Does MPT Simply Just Produce Herd Behavior?

This is the best line in this whole piece:

Perhaps, the greatest risk of MPT is in its being a mathematical model. It produces identical decisions for every investor simultaneously. When was this ever a safe thing for investors to do?

“Davidson” submits: 

Is Modern Portfolio Theory (MPT), articulated in 1952, with its mechanical investing approach that is presented as ‘modern’, ‘scientific’, ‘efficient’, ‘safe’ in fact not safe at all? It is worth asking this question when it has become nearly ubiquitous. Wall Street firms deploy it as the academic Nobel-Prize-winning methodology to reduce liabilities from customer complaints. Hedge funds, long-geared to short-term algorithmic trading platforms, deploy their strategies using it to reduce risk to highly levered positions on a daily basis. Financial Planning offered to individual investors globally is spoken of as ‘safe’ and offering ‘guaranteed returns’ on which to retire. Many tout the ability to tailor individual strategies to investors when the basis is in fact minor adjustments to an identical untailored mathematical analysis used across millions of investors advising Trillions.

Understanding the issues MPT brings with its application in nearly every nook and cranny of investing and even business planning requires understanding its basis. Some key factors are listed:

  • MPT is a mathematical price-trend strategy-fundamental analysis is not part of the equation
  • The world of investments is broken into asset classes, portfolios allocated by a risk assessment based on short-term volatility and rebalanced between asset classes based on statistical variations from multi-year averages
  • MPT meant to eliminate human decision input which is deemed fundamentally faulty
  • MPT creators and subsequent researchers have received multiple Nobel Prizes which in effect lower the liabilities of advisory firms recommending strategies based on it
  • MPT has been accepted to such a degree by business schools that these programs appear more like an extension of applied mathematics devoid of understanding differences in corporate management skills
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Disclaimer: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or ...

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